Interrupting the three-year long hiatus as some friends have asked for a quick run-down on the result of the Italian referendum.

How did we get here?

The long story (the context is important, but if you want the short story skip to the parts in bold at the bottom):

The end of Silvio: in November 2011, Italians took to the streets to sing the Hallelujah from Hendel’s Messiah to celebrate the fall of the third Berlusconi government. The resignation came on the back of a shrinking parliamentary majority as the Euro debt crisis became acute.

The technocratic government (2011-2013): on November 9, the President of the Republic appoints Mario Monti (a former EU Commissioner) as a senator for life, a title reserved for Italians of notable accomplishments, such as Nobel prize winners. In a somewhat undemocratic turn of events, after the fall of the Berlusconi government, Mario Monti (a university professor who had no previous political career) is asked to form a technocratic government to steer the country out of the crisis and enact structural economic reforms. After passing austerity measures and pension reform, Mario Monti announces that he will step down at the end of the legislature in 2013 and seek re-election. His party obtains 10.5% of the vote.

The Italian Grosse Coalition (2013-2014): the results of the 2013 elections were remarkable for two reasons. First, they mark the end of left/right politics as the country’s vote was split into three blocks, the Centre-Left (29.5%), the upstart 5 Star Movement (29.1%) and the Centre-Right (25.5%) with a bunch of small centrists and fringe parties making up the rest. Secondly, in order to stave off a 5SM-led government, Enrico letta from the leftist Democratic Party agrees to a Faustian pact with Berlusconi’s party, giving birth to a unique Left-Right coalition government, probably for the first time in the history of the Republic.

Renzi, the change maker (2014-2016): after winning the primary elections for the leadership of the Democratic Party, Matteo Renzi, the 38 year-old mayor of Florence, Renzi proceeds to reassures Enrico Letta that he has no intention to unseat him from the premiership by launching the hashtag #Enricostaisereno (#EnricoWorryNot). In Feb 2014, roughly 10 months after the beginning of the Letta government, Matteo Renzi unseats Letta and becomes PM, running on a platform of renewal and bringing vitality to Italy. Optimism is running high in the youngest and most gender-balanced cabinet in the history of the Republic.

At the European elections of May 2014 the Democratic Party wins 40.8% of the popular vote, the highest percentage of votes ever won by a leftist party in Italy and the highest absolute number of votes of any European party in the 2014 election.

Emboldened by the results of the EU elections, Renzi moves the constitutional reform to the front of the agenda. The complex constitutional reform primarily aims to make the legislative process more agile by moving away from perfect bicameralism (the Italian lower and upper houses have the same powers and are elected in a similar fashion not like the federal German or US Senate). The reform makes it through Parliament but without the sufficient number of votes to avoid a referendum. PM Renzi has to call for a referendum.

As the honeymoon phase tapers over (and the 5SM wins municipal elections in Rome and Turin by a large margin while the Democratic party clings on to Milan), PM Renzi vows that he will resign if the referendum does not pass. Warnings from his allies that politicizing the referendum might have negative consequences are not enough, Renzi doubles down on the threat. Rather than scaring people into voting in favor of the reform, this tactic has the effect of encouraging all the opposition to pile into the no vote. This includes the old guard in the democratic party that had been sidelined rudely by Renzi, some eminent constitutionalists, the 5-star movement, the xenophobic Right, the extreme Left, and Berlusconi (who flip-flopped form his early support).

The big constitutional elephant in the room is the fact that the country’s electoral law for the Senate has been deemed unconstitutional by the Constitutional Court and the electoral law for the lower house passed last April is awaiting a ruling from the Constitutional Court in the coming weeks. For fans of constitutional debate in translation, this article explains the nitty-gritty of the situation, but, barring a surprise ruling from the Court, the two electoral laws could lead to different majorities in both chambers (and call for divergent electoral strategies). A particular point of concern is the fact that, in its current form, the law for the lower house assigns a majority premium to the coalition that wins the plurality of votes. This means that the coalition that wins most votes gets 340 seats out of 620. A slight complication is that if no coalition list wins 40% of the votes in the first round, then the 340 seats go to the list that wins a run-off election. As things stand now, in case of a run-off, the 5-Star Movement is posed to win a majority in the lower house.

This leaves the following scenarios:

Renzi backpedals on the idea of resigning and instead sees through the end of the term to 2018. This seems unlikely, but as you may have gathered, continuity and coherence is not the biggest strength of the Italian political system. It would also be political harakiri for the Democratic Party, so Renzi is likely to face pressure not to stay, even if he should change his mind.

Renzi resigns now and the country goes to elections. This seems a bit extreme, especially given that the country is awaiting the decision of the Constitutional Court on the electoral law. As highlighted above, at the moment, the 5SM is likely to win majority in the lower house and, riding on the post-referendum victory, could scrape by a majority in the Senate or could form a minority government with Berlusconi’s party or the extreme right. Again, this would be political harakiri for the Left, so it is unlikely to happen.

Renzi resigns after passing the budget law. In my opinion this is the most likely option. In this case the following could happen:

Elections after his resignation: again unlikely for the point highlighted above

Care-taker government until end of mandate: A new PM is nominated and a cabinet reshuffle takes place with the mandate to see through the end of the legislature in 2018, revise the electoral law and push through some necessary reforms with cross-party support. It is not clear to me that there is any appetite for cross-party work, in particular given the insistence of the 5-Star movement to go for early election and Berlusconi’s eagerness to stage a comeback into the political limelight (yes, he could come back as the figure head though he is still banned from running for office). But then again, the Left and Berlusconi’s camp spat vitriol at each-other for 20 years only to come together in a grand coalition to avert a 5SM-led government. The Italian Parliament is a jungle full of chameleons.

A care-taker government to reform the electoral law: a government of technocrats or, more likely, led by institutional figures such as the speaker of the Senate or the current Ministry of the Economy is put in charge of reforming the electoral law (and maybe fix our impending banking crisis) and then calls for early elections. The electoral law would probably have to be one that appeals to all sides of the political spectrum. This is likely to take time and will probably offer a possibility to opponents of the 5SM to show the movement up by creating infighting (something that the movement seems to have a strong capacityfor).

It pains me to say that in both of the last two scenarios, Berlusconi’s party (in disarray, with no leadership and with the figure head barred from running) is probably going to be the kingmaker, as they could tilt the balance by siding with the 5SM. Thankfully, history has shown that Berlusconi’s party is something that could be up for sale. My uneducated guess would be that the last option (a care-taker government to change electoral law) is the most likely option. It buys the Democratic Party and Berlusconi’s party time to regroup, as both have been hemorrhaging votes to the 5SM.

Economics

The markets seemed to have had already priced in a no vote ahead of the referendum. Except for some volatility, no major drama took place since the vote in terms of Euro exchange rate or Italian bonds and stocks’ performance. Europe might send strong signals to Italy that it needs to sort out its banking crisis and provide a modicum of political stability so that the investors that have been lined up to bail-in/bail-out/bail-around Monte Paschi di Siena do not run for the woods. And/or it appears that state aid might be ready as a stop gap measure as soon as this weekend, to fill in the 5 billion euro gap and save the world’s oldest bank from dragging down the Italian and European banking system. Perhaps the strong resistance for state bailout from the German side has evaporated in the midst of this crisis?